ICAEW chart of the week: Pre-Budget debt forecast

My chart for ICAEW this week looks ahead to the Spring Budget and asks how much headroom the Chancellor will have available for tax cuts or higher spending while still meeting his fiscal targets.

Pre-Budget debt forecast
ICAEW chart of the week

Step chart showing underlying debt to GDP ratio in year from 2022/23 to 2028/29 with steps showing the change between each year.

Legend:

Increase (purple)
Decrease (green)
Underlying debt/GDP (orange)

2022/23: 84.9% (very top of bar shown only)
+4.1% increase
2023/24: 89.0%
+2.6%
2024/25: 91.6%
+1.1%
2025/26: 92.7%
+0.5%
2026/27: 93.2%
- (flat)
2027/28: 93.2%
-0.4% decrease - with a box pointing to this bar stating 'Fiscal headroom £13bn'
2028/29: 92.8%


22 Feb 2024.
Chart by Martin Wheatcroft FCA. Design by Sunday.

Source: OBR, 'Economic and Fiscal Outlook, Nov 2023'.

(c) ICAEW 2024

The Chancellor is currently getting ready for his Spring Budget on Wednesday 6 March 2024, with rumours, leaks and misinformation swirling around ahead of what will be a keenly watched event – quite probably the last fiscal event before the general election.

As our chart illustrates, the Office for Budget Responsibility (OBR) at the time of the Autumn Statement last November projected that the ratio of underlying debt to GDP would increase in the current financial year (2023/24) and further over the first four years of the forecast period, before starting to fall in the final year (2028/29).

Underlying debt is defined as public sector net debt (PSND) excluding Bank of England liabilities (PSNDexBoE). This alternative metric avoids distortion in the headline measure of debt caused by £170bn of Term Funding Scheme loan receivables not netted against related Bank of England liabilities that will reduce PSND as these loans are repaid, even though net financial assets and liabilities are not changing.

The projected increases are +4.1% from 84.9% at March 2023 to 89.0% at the end of 2023/24, +2.6% to 91.6% in 2024/25, +1.1% to 92.7% in 2025/26 and +0.5% to 93.2% in 2026/27, before staying flat in 2027/28 and then falling -0.4% to 92.8% in March 2029. 

The fall in 2028/29 projected by the OBR in November provided the Chancellor with £13bn of fiscal headroom in the final year of the forecast. In theory this meant he could have planned to spend more, or cut taxes, by up to £13bn in 2028/29 and still met his primary fiscal target, which is for underlying debt/GDP to be declining in the final year of the fiscal forecast period.

Building such a relatively small amount of headroom into a forecast – less than four days of total government spending – is perhaps surprising given the high degree of uncertainty in predicting future receipts, spending and borrowing, not to mention GDP. These numbers can all move by tens of billions between forecasts, as the economic situation changes and policy and budgetary decisions are made. 

GDP can be especially variable, with the Office for National Statistics making frequent revisions to its estimates, sometimes many years later. Several commentators also believe the numbers for planned public spending from April 2025 onwards are unrealistic and that there will be a need to revise these numbers upwards in subsequent fiscal events.

Although there has been a modest boost to the public finances in the reported numbers for the first 10 months of the current financial year, underlying debt/GDP at January 2023 was 88.1%, on track to end the financial year at close to the 89.0% in the November OBR forecast.

The news that the UK had entered recession in the last quarter of 2023 will not have been positive for the Chancellor in his search for additional headroom but, despite this, it is believed that the forecasts will improve sufficiently to allow him some capacity to either increase the total amounts allocated to public spending, or announce tax cuts, while still keeping with his fiscal targets. Of these options, tax cuts are considered much more likely. 

Either way, underlying debt/GDP will be expected to be higher in five years’ time – potentially even higher than in previous forecasts. From a fiscal target perspective, what is important is whether the ratio is falling in the fifth year of the forecast period, not the overall change in the level between now and then.

For more information about the Spring Budget 2024 and ICAEW’s letters to the Chancellor and HM Treasury, click here.

This chart was originally published by ICAEW.

Modest boost to public finances won’t stop taxes rising

Prior month revisions boost public finances despite worse than expected self assessment receipts, as a think tank says tax cuts in the Budget will be sandwiched between tax rises in the years before and after.

The monthly public sector finances for January 2024 reported a provisional surplus for the month of £17bn, slightly less than expected, while at the same time revising the year-to-date deficit down. 

The figures, released by the Office for National Statistics (ONS) yesterday, show a cumulative deficit for the first 10 months of the financial year to £97bn, £3bn less than in the same period last year. The year-to-date variance against the Office for Budget Responsibility (OBR)’s Autumn Statement forecast improved from £5bn last month to £9bn this month. 

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, said: “Lower self assessment tax receipts than expected in January were offset by revisions to numbers from previous months to improve the overall financial picture.

“This small improvement helps only a little with an extremely weak fiscal position facing the Chancellor as he approaches the Budget, with questions already being asked about whether existing plans to cut public spending in the near term are realistically achievable. Rumours that the Chancellor is thinking about further reductions in public spending to fund tax cuts will therefore need to be balanced with his ability to maintain credibility with debt markets.”

The Resolution Foundation reported that likely net tax cuts in the coming financial year of around £10bn are sandwiched between £20bn of tax rises that have already been implemented in the current financial year – including threshold freezes and the corporation tax rate rise from 19% to 25% – and £17bn in net tax rises that have been pre-announced up to 2027/28 (primarily from threshold freezes and stamp duty land tax).

The think tank’s pre-Budget analysis estimates that the cut in national insurance announced in November plus around £10bn in potential new tax cuts to be announced in the Budget would result in a net reduction in taxes of just under £10bn for 2024/25 after taking account of threshold freezes and other tax changes.

The Resolution Foundation analysis does not take account of the normal pattern that sees governments typically raise taxes in the first Budget after a general election, which is even more likely this time around given what many commentators believe are unrealistic spending assumptions for 2025/26 onwards. 

Month of January 2024

Self assessment tax receipts were lower than expected in January 2024, with the fiscal surplus of £17bn for the month coming in at £9bn better than last year but £2bn less than the OBR’s Autumn Statement projection.

Taxes and other receipts amounted to £120bn, up 4% compared with January 2023, while total managed expenditure was £103bn, down 5%.

Public sector net debt as of 31 January 2024 was £2,646bn or 96.5% of GDP, £41bn lower than 31 December but £107bn higher than at the start of the financial year.

Ten months to January 2024

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the first five sixths of the 2023/24 financial year to January 2024 was £97bn, £3bn less than the £100bn deficit reported for the first ten months of 2022/23. This reflected a year-to-date shortfall between tax and other receipts of £901bn and total managed expenditure of £998bn, up 6% and 5% compared with April 2022 to January 2023.

Inflation benefited tax receipts for the first 10 months compared with the same period in the previous year, with income tax up 11% to £224bn and VAT up 6% to £165bn. Corporation tax receipts were up 17% to £85bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023. 

Meanwhile,national insurance receipts were up by just 1% to £148bn as the abolition of the short-lived health and social care levy in 2022/23 offset the effect of wage increases in the current financial year, as well as the cut in national insurance implemented in January. 

Council tax receipts were up 6% to £36bn, but stamp duty on properties was down by 25% to £11bn and the total for all other taxes was flat at £137bn as economic activity slowed. Non-tax receipts were up 10% to £95bn, primarily driven by higher investment income and higher interest charged on student loans.

Total managed expenditure of £998bn in the ten months to January 2024 can be analysed between current expenditure excluding interest of £846bn, interest of £105bn and net investment of £47bn, compared with £949n in the same period in the previous year, comprising £810bn, £114bn and £25bn respectively.

The increase of £36bn or 4% in current expenditure excluding interest was driven by a £28bn increase in pension and other welfare benefits (including cost-of-living payments), £18bn in higher central government pay and £10bn in additional central government procurement spending, less £13bn in lower subsidy payments (principally relating to energy support schemes) and £7bn in net other changes.

The fall in interest costs for the ten months of £9bn or 8% to £105bn comprises a £23bn or 50% reduction to £23bn for interest accrued on index-linked debt as the rate of inflation fell, partially offset by a £14bn or 21% increase to £82bn from higher interest rates on variable-rate debt and new and refinanced fixed-rate debt.

The £21bn increase in net investment spending to £47bn in the first ten months of the current year is distorted by a one-off credit of £10bn arising from changes in interest rates and repayment terms of student loans recorded in December 2022. Adjusting for that credit, the increase of £12bn reflects high construction cost inflation amongst other factors that saw a £16bn or 19% increase in gross investment to £101bn, less a £4bn or 8% increase in depreciation to £54bn.

Public sector finance trends: January 2024

Table with fiscal numbers for the ten months to Jan 2020, Jan 2021, Jan 2022, Jan 2023 and Jan 2024, all in £bn.

Receipts: 685 | 647 | 754 | 849 | 901
Expenditure: (588) | (746) | (686) | (722) | (761)
Interest: (44) | (33) | (55) | (103) | (97)
Net investment: (26) | (51) | (35) | (16) | (37)
[subtotal] Deficit: (61) | (270) | (123) | (108) | (119)
Other borrowing: 3 | (67) | (85) | (8) | (27)
[total] Debt movement: (58) | (337) | (208) | (116) | (146)

Net debt: 1,835 | 2,152 | 2,360 | 2,497 | 2,686
Net debt / GDP: 84.8% | 98.7% | 97.9% | 95.8% | 97.7%

The cumulative deficit of £97bn for the first 10 months of the financial year is £9bn below the OBR’s November 2023 forecast of £106bn for that same period. The OBR is forecasting deficits of £6bn and £12bn in February and March to result in a full year forecast of £124bn, or £115bn if the £9bn forecast variance persists. 

Balance sheet metrics

Public sector net debt was £2,646bn at the end of January 2024, equivalent to 96.5% of GDP.

The debt movement since the start of the financial year is £107bn, comprising borrowing to fund the deficit for the ten months of £97bn plus £10bn in net cash outflows to fund lending to students, businesses and others, net of loan repayments and working capital movements.

Public sector net debt is £831bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,108bn more than the £538bn number as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last couple of decades.

Public sector net worth, the new balance sheet metric launched by the ONS this year, was -£677bn on 31 January 2024, comprising £1,584bn in non-financial assets and £1,047bn in non-liquid financial assets minus £2,646bn of net debt (£303bn liquid financial assets – £2,949bn public sector gross debt) and other liabilities of £662bn. This is a £62bn deterioration from the -£615bn reported for 31 March 2023.

Revisions

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled. 

The latest release saw the ONS revise the reported deficit for the nine months to December 2023 down by £6bn from £119bn to £113bn as estimates of tax receipts and expenditure were updated for better data and the correction of errors in HMRC reporting, while the debt to GDP ratio at the end of December 2023 was revised up by 0.5 percentage points from 97.7% to 98.2% as GDP estimates were updated.

The ONS also revised its estimate for the deficit for the financial year to March 2023, down by £1bn to £129bn for 2022/23.

This article was written by Martin Wheatcroft FCA on behalf of ICAEW and it was originally published by ICAEW.

Public finances beat forecast amid tough economic landscape

Year-to-date deficit of £119bn is £5bn lower than latest Office for Budget Responsibility forecast – but is still £11bn worse than this time last year.

Public sector finances for December 2023, released by the Office for National Statistics (ONS) on Tuesday, reported a provisional deficit of £8bn – less than expected – while at the same time revising the year-to-date deficit down by £5bn. This brought the cumulative deficit for the first three-quarters of the financial year to £119bn, £11bn more than in the same nine-month period last year.

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, comments: “Today’s numbers show a cumulative deficit of £119bn for the first three-quarters of the financial year, the fourth highest on record. This should be close to the total at the end of the tax year, as income from self-assessment tax receipts in January is likely to offset deficits in February and March. At £5bn less than the Office for Budget Responsibility’s latest forecast, the Chancellor will be pleased by this marginal improvement in fiscal headroom just when he needs it most.

“However, the Chancellor will still be concerned by the tough economic landscape, with disappointing retail sales data for the final quarter of 2023 and an unexpected rise in inflation last month, and what that might mean for the fiscal forecasts. He is under significant pressure to cut taxes ahead of the general election, but will be all too aware of the need for greater investment in public services and infrastructure if he is to be able to lay the foundations for economic growth in the next Parliament. The risk of local authorities going bust will also be on his mind as he seeks to generate positive economic vibes going into the general election campaign.”

Month of December 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of December 2023 was £8bn, made up of tax and other receipts of £89bn less total managed expenditure of £97bn, up 6% and down 3% respectively compared with December 2022. 

This was the lowest December deficit since 2019, principally because interest on Retail Prices Index-linked debt fell from £14bn in December 2022 to close to zero in December 2023.

Public sector net debt as at 31 December 2023 was £2,686bn or 97.7% of GDP, up £15bn during the month and £146bn higher than at the start of the financial year.

Nine months to December 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the first three quarters of the financial year to December 2023 was £119bn, £11bn more than the £108bn deficit reported for the first nine months of 2022/23. 

This reflected a year-to-date shortfall between tax and other receipts of £776bn and total managed expenditure of £895bn, both up 6% compared with April to December 2022.

Inflation benefitted tax receipts for the first nine months compared with the same period in the previous year, with income tax up 10% to £178bn and VAT up 7% to £150bn. Corporation tax receipts were up 18% to £76bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023, while national insurance receipts were up by just 1% to £132bn as the abolition of the short-lived health and social care levy in 2022/23 offset the effect of wage increases in the current financial year. 

Council tax receipts were up 6% to £33bn, but stamp duty on properties was down by 27% to £10bn and the total for all other taxes was down by 3% to £112bn as economic activity slowed. Non-tax receipts were up 11% to £84bn, primarily driven by higher investment income and higher interest receivable on student loans.

Total managed expenditure of £895bn in the nine months to December 2023 can be analysed between current expenditure excluding interest of £761bn, interest of £97bn and net investment of £37bn, compared with £841bn in the same period in the previous year, comprising £722bn, £103bn and £16bn respectively.

The increase of £39bn or 5% in current expenditure excluding interest was driven by a £24bn increase in pension and other welfare benefits (including cost-of-living payments), £15bn in higher central government pay and £8bn in additional central government procurement spending, less £6bn in lower subsidy payments (principally relating to energy support schemes) and £2bn in net other changes.

The fall in interest costs for the nine months of £6bn to £97bn comprises an £18bn or 39% fall to £28bn for interest accrued on index-linked debt from a lower rate of inflation, partially offset by a £12bn or 21% increase to £69bn for interest not linked to inflation from higher interest rates.

The £21bn increase in net investment spending to £37bn in the first nine months of the current year is distorted by a one-off credit of £10bn arising from changes in interest rates and repayment terms of student loans recorded in December 2022. Adjusting for that credit, the increase of £11bn or 42% reflects high construction cost inflation, among other factors, which saw a £14bn or 20% increase in gross investment to £85bn, less a £3bn or 7% increase in depreciation to £48bn.

Public sector finance trends: December 2023

Table showing fiscal numbers for the nine months to Dec 2019, 2020, 2021, 2022 and 2023.

Receipts: 597 | 560 | 653 | 733 | 776
Expenditure: (588) | (746) | (686) | (722) | (761)
Interest: (44) | (33) | (55) | (103) | (97)
Net investment: (26) | (51) | (35) | (16) | (37)
[subtotal] Deficit: (61) | (270) | (123) | (108) | (119)
Other borrowing: 3 | (67) | (85) | (8) | (27)
[total] Debt movement: (58) | (337) | (208) | (116) | (146)

Net debt: 1,835 | 2,152 | 2,360 | 2,497 | 2,686
Net debt / GDP: 84.8% | 98.7% | 97.9% | 95.8% | 97.7%

The cumulative deficit of £119bn for the first three-quarters of the financial year is £5bn below the Office for Budget Responsibility (OBR)’s November 2023 forecast of £124bn for the nine months to December 2023. The OBR is also forecasting a full year forecast of £124bn as it expects self-assessment tax receipts in January to offset projected deficits in February and March 2024. 

Balance sheet metrics

Public sector net debt was £2,686bn at the end of December 2023, equivalent to 97.7% of GDP.

The debt movement since the start of the financial year is £146bn, comprising borrowing to fund the deficit for the nine months of £119bn plus £27bn in net cash outflows to fund lending to students, businesses and others, net of loan repayments and working capital movements.

Public sector net debt is £871bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,330bn more than the £538bn number as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last couple of decades.

Public sector net worth, the new balance sheet metric launched by the ONS this year, was -£715bn on 31 December 2023, comprising £1,584bn in non-financial assets and £1,049bn in non-liquid financial assets minus £2,686bn of net debt (£296bn liquid financial assets – £2,982bn public sector gross debt) and other liabilities of £662bn. This is a £100bn deterioration from the -£615bn reported for 31 March 2023.

Revisions

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled. 

The latest release saw the ONS revise the reported deficit for the eight months to November 2023 down by £5bn from £116bn to £111bn as estimates of tax receipts and expenditure were updated for better data, while the debt to GDP ratio at the end of November 2023 was revised down by 0.1 percentage points from 97.5% to 97.4%.

The ONS also revised its estimate for the deficit for the financial year to March 2023, down by £1bn to £130bn for 2022/23.

This article was written by Martin Wheatcroft FCA on behalf of ICAEW and it was originally published by ICAEW.

Gap between public sector income and spending reaches £116bn

Latest public sector finance numbers reveal a challenging fiscal backdrop for both government and opposition ahead of a general election.

The monthly public sector finances for November 2023 released by the Office for National Statistics (ONS) on Thursday 21 December 2023 reported a provisional deficit for the month of £14bn and revised the year-to-date deficit up by £4bn, bringing the cumulative deficit for the first two-thirds of the financial year to £116bn, £24bn more than in the same eight-month period last year.

Alison Ring OBE FCA, ICAEW Director for Public Sector and Taxation, said: “These numbers confirm that the government’s financial difficulties are continuing to mount, with the shortfall between income and public spending reaching an unsustainable £116bn for the first two-thirds of the financial year, surpassing the £100bn milestone and providing a challenging fiscal backdrop for both the government and the opposition ahead of a general election.

“While the Prime Minister and the Chancellor continue to search for cost savings to free up capacity for further pre-election tax cuts, the opposition will be concerned about the fiscal legacy it would inherit if it were to take power. 

“The deteriorating state of the UK’s public services is a big concern for all politicians given that it implies a need for substantial tax rises after the general election, irrespective of who wins.”

Month of November 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of November 2023 was £14bn, made up of tax and other receipts of £86bn less total managed expenditure of £100bn, up 5% and 3% respectively compared with November 2022. 

This was the fourth highest November deficit on record since monthly records began in 1997, following monthly deficits of £15bn, £22bn and £15bn in November 2010, 2020, and 2022 respectively.

Public sector net debt as of 30 November 2023 was £2,671bn or 97.5% of GDP, up £30bn during the month and £132bn higher than at the start of the financial year.

Table titled 'Public sector finance trends: November 2023'

Eight months to Nov 2019, Nov 2020, Nov 2021, Nov 2022 and Nov 2023 respectively.

£bn except where stated.

Receipts:  530, 491, 574, 648, 682
Expenditure: (522), (661), (610), (635), (676)
Interest: (41), (30), (46), (83), (90)
Net investment: (22), (46), (31), (22), (32)
Subtotal line
Deficit: (55), (246), (113), (92), (116)
Other borrowing: 5, (67), (83), (4), (15)
Total line above
Debt movement: (50), (313), (196), (96), (131)
Total line below

Net debt: £1,827bn, £2,128bn, £2,348bn, £2,477bn, £2,671bn

Net debt / GDP: 83.4%, 99.1%, 98.5%, 95.7%, 97.5%.

Eight months to November 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the first two thirds of the financial year to November 2023 was £116bn, £24bn more than the £92bn deficit reported for the first eight months of 2022/23. This reflected a year-to-date shortfall between tax and other receipts of £682bn and total managed expenditure of £798bn, up 5% and 8% respectively compared with April to November 2022.

Inflation benefited tax receipts for the first eight months compared with the same period in the previous year, with income tax up 10% to £156bn and VAT up 8% to £134bn. Corporation tax receipts were up 10% to £62bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023, while national insurance receipts were down by 3% to £114bn because of the abolition of the short-lived health and social care levy last year. Stamp duty on properties was down by 27% to £9bn and the total for all other taxes was up just 3% to £132bn, much less than inflation, as economic activity slowed. Non-tax receipts were up 11% to £75bn, primarily driven by higher investment income.

Total managed expenditure of £798bn in the eight months to November 2023 can be analysed between current expenditure excluding interest of £676bn, up £41bn or 6% over the same period in the previous year, interest of £90bn, up £7bn or 8%, and net investment of £32bn, up £10bn or 45%.

The increase of £41bn in current expenditure excluding interest was driven by a £21bn increase in pension and other welfare benefits (including cost-of-living payments), £14bn in higher central government pay and £7bn in additional central government procurement spending, less £1bn in net other changes.

The rise in interest costs for the eight months of £7bn to £90bn comprises a £20bn or 43% increase to £67bn for interest not linked to inflation as the Bank of England base rate rose, partially offset by an £13bn or 37% fall to £23bn for interest accrued on index-linked debt from lower inflation than last year.

The £10bn increase in net investment spending to £32bn in the first eight months of the current year reflects high construction cost inflation amongst other factors that saw a £13bn or 21% increase in gross investment to £75bn, less a £3bn or 8% increase in depreciation to £43bn. 

The cumulative deficit of £116bn for the first two-thirds of the financial year is £8bn below the Office for Budget Responsibility (OBR)’s official forecast of £124bn for the full financial year as compiled in November 2023 for the Autumn Statement. The deficit for the last third of the financial year is normally much smaller than for the first two-thirds because of self assessment tax returns arriving in January that boost tax receipts.

Balance sheet metrics

Public sector net debt was £2,671bn at the end of November 2023, equivalent to 97.5% of GDP.

The debt movement since the start of the financial year was £131bn, comprising borrowing to fund the deficit for the eight months of £116bn plus £15bn in net cash outflows to fund lending to students, businesses and others net of loan repayments and working capital movements.

Public sector net debt is £856bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,133bn more than the £538bn number as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last couple of decades.

Public sector net worth, the new balance sheet metric launched by the ONS this year, was -£715bn on 30 November 2023, comprising £1,565bn in non-financial assets and £1,054bn in non-liquid financial assets minus £2,671bn of net debt (£303bn liquid financial assets – £2,974bn public sector gross debt) and other liabilities of £663bn. This is a £100bn deterioration from the -£615bn reported for 31 March 2023.

Revisions

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled. 

The latest release saw the ONS revise the reported deficit for the seven months to October 2023 up by £4bn from £98bn to £102bn as estimates of tax receipts and expenditure were updated for better data, while the debt to GDP ratio at the end of October 2023 was revised down by 1.2 percentage points from 97.8% to 96.6% as a consequence of updated estimates of GDP.

The ONS also revised up its estimates for the deficit for the financial years to March 2023 and 2022 respectively, by £3bn to £131bn for 2022/23 and by £2bn to £124bn for 2021/22.

This article was originally published by ICAEW.

ICAEW chart of the week: Exploding debt

My chart for ICAEW this week takes a look at how UK public debt has exploded since the financial crisis to more than quintuple from £0.6trn in March 2008 to a projected £3.1trn in March 2029.

Exploding debt

Step chart showing how UK public sector net has changed between March 2008 and the projected position in March 2029.

[debt bars shaded orange, changes shaded in purple]

March 2008: £0.6trn
Financial crisis: +£0.7trn
March 2012: £1.3trn
Austerity years: +£0.5trn
March 2020: £1.8trn
Pandemic / energy crisis: +£0.9trn
March 2024: £2.7trn

[bar colours shaded by 50% to indicate the following are projected numbers]

Latest plan: +£0.4trn
March 2029:  £3.1trn

30 Nov 2023.
Chart by Martin Wheatcroft FCA. Design by Sunday.
Source: OBR, 'Public finances databank - Nov 2023'.

As illustrated by our chart this week, the sums borrowed by the government since the financial crisis of a decade and half ago have been truly astonishing. 

In March 2008, the official measure of net debt for the UK public sector was less than £0.6trn. During the financial crisis, government borrowing totalled £0.7trn over a four-year period, causing public sector net debt to more than double to £1.3bn in March 2012. 

The eight austerity years saw government cut spending on public services to a significant degree but still borrow a further £0.5trn to see net debt reach £1.8trn in March 2020 – arguably not mending the roof while the sun was shining. This was then followed by an exceptional amount of borrowing during four years of pandemic and energy crisis (including the current financial year) that is expected to see net debt increase by a total of £0.9trn to reach £2.7trn in March 2024.

The Autumn Statement 2023 on Wednesday 22 November saw the Chancellor set out his latest plan for the UK public finances over the next five financial years. This includes a further £0.4trn of borrowing, with public sector net debt projected to amount to £3.1trn in March 2029 – more than quintuple the net amount owed by the UK state 21 years earlier in March 2008.

This assumes that the government can stick to its borrowing plans – many commentators have suggested that planned cuts in spending on public services are unrealistic, meaning more borrowing if taxes are not to rise.

The £2.5trn increase in debt between 2008 and 2029 comprises £2.2trn in borrowing to fund 21 years of deficits (the annual shortfall between receipts and spending) and £0.3trn in other borrowing to fund government lending (such as student loans) and working capital requirements.

As a share of the economy, the increase is less dramatic but still significant – rising from a net debt to GDP ratio of 35.6% in March 2008, to 74.3% in March 2012, to 85.2% in March 2020, to an anticipated 97.9% in March 2024. However, the good news is that net debt / GDP is expected to fall to 94.1% in March 2029 as inflation and economic growth offset the additional borrowing.

The worry for this (or any alternative) government is that while borrowing levels in the OBR’s forecast spreadsheet for the next five years appear manageable and are (just) within the current fiscal rules, the numbers assume that we don’t enter another recession or other economic crisis in that time. Otherwise, we could see debt exploding again.

This chart was originally published by ICAEW.

Public sector net debt hits an unprecedented £2.6trn

Monthly public sector finances for October saw spending continue to exceed receipts by a large margin, even if by less than was predicted earlier in the year.

The Office for National Statistics (ONS) released the month public sector finances for October on Tuesday 21 November 2023. It reported a provisional deficit for the month of October of £15bn, bringing the cumulative deficit for the first seven months of the year to £98bn, £22bn more than in the same period last year.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “Although it is positive that the cumulative deficit to October of £98bn is less than the £115bn predicted by the OBR, cash going out continues to exceed cash coming in by a very large margin. Public sector net debt has now exceeded £2.6 trillion for the first time, which is a staggering new record.  

“Tomorrow’s Autumn Statement will see the OBR revise and roll forward its forecast, giving the Chancellor so-called headroom to cut taxes or increase spending. But in reality there is no headroom when the public finances continue to be on an unsustainable path without a long-term fiscal strategy to fix them.”

Month of October 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of October 2023 was £15bn, made up of tax and other receipts of £85bn less total managed expenditure of £100bn, up 3% and 6% respectively compared with October 2022. 

This was the second highest October deficit on record since monthly records began in 1993, following a monthly deficit of £18bn in October 2020 at the height of the pandemic.

Public sector net debt as of 31 October 2023 was £2,644bn or 97.8% of GDP, the first time it has exceeded £2.6trn – only eight months after it first reached £2.5trn.

Seven months to October 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the seven months to October 2023 was £98bn, £22bn more than the £76bn deficit reported for the first seven months of 2022/23. This reflected a widening gap between tax and other receipts for the seven months of £595bn and total managed expenditure of £693bn, up 5% and 8% respectively compared with April to October 2022.

Inflation benefited tax receipts for the first seven months compared with the first half of the previous year, with income tax up 10% to £137bn and VAT up 9% to £117bn. Corporation tax receipts were up 12% to £55bn, partly reflecting the increase in the corporation tax rate from 19% to 25% from 1 April 2023, while national insurance receipts were down by 4% to £99bn because of the abolition of the short-lived health and social care levy last year. Stamp duty on properties was down by 27% to £8bn and the total for all other taxes was up just 3% to £115bn, much less than inflation as economic activity slowed. Non-tax receipts were up 10% to £63bn, primarily driven by higher investment income.

Total managed expenditure of £693bn in the seven months to October 2023 can be analysed between current expenditure excluding interest of £587bn, up £39bn or 7% over the same period in the previous year, interest of £76bn, up £4bn or 5%, and net investment of £30bn, up £9bn or 44%.

The increase of £39bn in current expenditure excluding interest was driven by a £20bn increase in pension and other welfare (including cost-of-living payments), £12bn in higher central government pay, £6bn in additional central government procurement spending, plus £1bn in net other changes.

The rise in interest costs for the seven months of £4bn to £76bn comprises a £18bn or 53% increase to £52bn for interest not linked to inflation as the Bank of England base rate rose, mostly offset by an £14bn or 37% fall to £24bn for interest accrued on index-linked debt from lower inflation than last year.The £9bn increase in net investment spending to £30bn in the first seven months of the current year reflects high construction cost inflation amongst other factors that saw a £11bn or 17% increase in gross investment to £65bn, less a £2bn or 6% increase in depreciation to £35bn. 

Public sector finance trends: October 2023

Table showing receipts, expenditure, interest, net investment, deficit, other borrowing and debt movement for the seven months to October 2023 plus net debt and net debt / GDP at 31 October 2023.

Receipts: £466bn (Oct 2019), £425bn (Oct 2020), £500bn (Oct 2021), £565bn (Oct 2022), £595bn (Oct 2023)
Expenditure: (£457bn), (£582bn), (£536bn), (£548bn), (£587bn)
Interest: (£38bn), (£26bn), (£41bn), (£72bn), (£76bn)
Net investment: (£20bn), (£42bn), (£28bn), (£21bn), (£30bn)
[line above subtotal]
Deficit: (£49bn), (£225bn), (£105bn), (£76bn), (£98bn)
Other borrowing: £5bn, (£61bn), (£61bn), £5bn, (£7bn)
[line above total]
Debt movement:  (£44bn), (£286bn), (£166bn), (£71bn), (£105bn)
[line below total]

Net debt: £1,821bn, £2,101bn, £2,319bn, £2,454bn, £2,644bn.
Net debt / GDP: 82.1%, 99.3%, 97.5%, 95.5%, 97.8%

The cumulative deficit of £98bn is £17bn lower than the Office for Budget Responsibility (OBR)’s official forecast of £115bn for the first seven months of 2023/24 as compiled in March 2023. The OBR is expected to revise its forecast for the full year deficit down from £132bn in tomorrow’s Autumn Statement, but it is still on track to be more than double the £50bn projection for 2023/24 set out in the official forecast from a year earlier (March 2022). 

Balance sheet metrics

Public sector net debt was £2,644bn at the end of October 2023, equivalent to 97.8% of GDP.

The debt movement since the start of the financial year was £105bn, comprising borrowing to fund the deficit for the seven months of £98bn plus £7bn in net cash outflows to fund lending to students, businesses and others net of loan repayments together with working capital movements.

Public sector net debt is £829bn more than the £1,815bn reported for 31 March 2020 at the start of the pandemic and £2,106bn more than the £538bn number as of 31 March 2007 before the financial crisis, reflecting the huge sums borrowed over the last couple of decades.

Public sector net worth, the new balance sheet metric launched by the ONS this year, was -£716bn on 31 October 2023, comprising £1,565bn in non-financial assets, £1,029bn in non-liquid financial assets, £2,644bn of net debt (£305bn in liquid financial assets less public sector gross debt of £2,949bn) and other liabilities of £666bn. This is a £102bn deterioration from the -£614bn reported for 31 March 2023.

Revisions

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled. 

The latest release saw the ONS revise the reported deficit for the six months to September 2023 up by £1.7bn as estimates of tax receipts and expenditure were updated for better data, while the debt to GDP ratio at the end of September 2023 was revised down by 1.4 percentage points from 97.8% to 96.4% as a consequence of updated estimates of GDP.

This article was originally published by ICAEW.

ICAEW chart of the week: US federal government deficit 2023

My chart this week looks at the federal deficit of $1.7trn reported by the US government for its recently completed financial year ended 30 September 2023.

Column chart split into three vertical sections: receipts, outlays and deficit. 

Actuals for the five years to the year ended September 2023, then budget for Y/E Sep 2024.

Y/E Sep 2019: $3.5trn receipts - $4.5trn outlays = -$1.0trn deficit
Y/E Sep 2020: $3.4trn - $6.5trn = -$3.1trn
Y/E Sep 2021: $4.0trn - $6.8trn = -$2.8trn
Y/E Sep 2022: $4.9trn - $6.3trn = -$1.4trn
Y/E Sep 2023: $4.4trn - $6.1trn = -$1.7trn
Y/E Sep 2024 (Budget): $5.0trn - $6.9trn = -$1.9trn

26 Oct 2023.   Chart by Martin Wheatcroft FCA. Design by Sunday.

Sources: US Department of the Treasury; US Office of Budget and Management.

The US Department of Treasury published on 20 October 2023 its final monthly treasury statement for the US government’s financial year ended 30 September 2023 (FY2023), enabling our chart this week to look at the actual numbers over the past five years and the budget for the new financial year that started on 1 October.

Our chart illustrates how the deficit increased significantly from the $1.0trn reported for FY2019 ($3.5trn receipts less $4.5trn outlays) to $3.1trn in FY2020 ($3.4trn-6.5trn) and $2.8trn in FY2021 ($4.0trn-$6.8trn) at the height of the pandemic, before falling to $1.4trn in FY2022 ($4.9trn-$6.3trn) as the US economy recovered. The deficit by $0.3trn increased to $1.7trn in FY2023 ($4.4trn-$6.1trn) and is budgeted to increase by a further $0.2trn to $1.9trn in FY2024 ($5.0trn forecast receipts-$6.9trn forecast outlays).

Not shown in the chart is the excess of financial liabilities over financial assets, which increased by $1.7trn from $22.3trn on 30 September 2022 to $24.0trn on 30 September 2023. This differs from ‘debt held by the public’ (the headline measure of federal debt), which increased by $2.0trn from $24.3trn to $26.3trn, more than the federal deficit because of movements in other financial assets and liabilities.

Receipts in FY2023 of $4,439bn comprised $2,176bn in individual income taxes, £1,614bn in social security and retirement contributions, $420bn in corporation income taxes, $80bn in customs duties, $76bn in excise taxes, £34bn in estate and gift taxes and $39bn in other receipts. Outlays for same period of $6,134bn comprised $1,737bn on health and Medicare, $1,354bn on social security, $821bn on defence, $774bn in welfare benefits, $659bn in interest, $302bn for veteran services and benefits, $127bn on transportation, $100bn on commerce, and $260bn on other outlays. 

The latter includes the administration of justice, agriculture, community and regional development, education, training, employment and social services, energy, general government, general science, space and technology, international affairs, natural resources and environment, and undistributed offsetting receipts.

These amounts are different from the accruals-based US GAAP federal government financial statements for FY2023 that are expected to be published next April, which will show a much larger accounting loss than the federal deficit reported here. For example, the FY2022 net operating cost (ie accounting loss) of $4.2trn was $2.8trn higher than the federal deficit of $1.4trn for last year, of which the largest difference of $2.6trn related to accruals for federal employee and veteran benefits.

These amounts appear astronomical, especially to those of us living in smaller (and unfortunately) less prosperous countries than the 335m people who live in the US, with its estimated GDP of $26.3trn in FY2023 – equivalent to around $6,600 per person per month.

Federal receipts and outlays in FY2023 represented 17% and 23% of GDP respectively or on a per capita basis were approximately $1,105 and $1,525 per person per month. The federal deficit was therefore equivalent to 6% of GDP or $420 per person per month. 

The excess of financial liabilities over financial assets and debt held by the public were 91% and 100% of GDP respectively, equivalent to an amount owed of around $71,500 or $78,500 per person, depending on which measure is used.

This chart was originally published by ICAEW.

August public sector finances: fourth-highest monthly deficit on record

Deficit marginally better than had been expected according to the latest figures from the ONS, but costly public sector problems emerge.

 The monthly public sector finances for August 2023 were released by the Office for National Statistics (ONS) on Thursday 21 September 2023. These reported a provisional deficit for the fifth month of the 2023/24 financial year of £12bn, bringing the total deficit for the five months to £70bn, £19bn more than in the same period in the previous year.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “While August’s deficit was marginally better than expected, problems costly to the public sector continue to emerge, from crumbling concrete in public buildings to Birmingham Council’s recent bankruptcy, and are likely to weigh on the Chancellor’s mind as he considers November’s Autumn Statement. 

“Both main parties are rightly cautious about making new public spending commitments in the current economic environment, including whether or not to extend the state pension triple lock into the next parliament. Whether they can hold this position as they enter into the party conference season remains to be seen.”

Month of August 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of August 2023 was just under £12bn, being tax and other receipts of £84bn less total managed expenditure of £96bn – up 5% and 8% respectively compared with August 2022.

This was the fourth highest August deficit on record since monthly records began in 1993, following the deficits of £14bn in August 2021 and £24bn in August 2020 during the pandemic and £12bn in August 2009 during the financial crisis.

Five months to August 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the five months to August 2023 was £70bn, £20bn more than the £50bn deficit reported for the first five months of 2022/23. This reflected a widening gap between tax and other receipts for the five months of £428bn and total managed expenditure of £498bn, up 7% and 10% respectively compared with April to August 2022.

Inflation benefited tax receipts for the first five months compared with the previous year, with income tax and VAT receipts both up 12% to £104bn and £84bn respectively. However, corporation tax was only up 13% to £37bn despite the increase in the corporation tax rate from 19% to 25% from 1 April 2023, and national insurance receipts were down by 3% to £71bn because of the abolition of the short-lived health and social care levy last year. Stamp duty on properties was down by £2bn or 29% to £6bn and the total for all other taxes was up just 3% to £82bn as economic activity slowed. Non-tax receipts were up 12% to £44bn, primarily driven by higher investment income.

Total managed expenditure of £428bn in the five months to August can be analysed between current expenditure excluding interest of £418bn (up £34bn or 9% over the same period in the previous year), interest of £61bn (up £6bn or 11%), and net investment of £19bn (up £7bn or 57%).

The increase of £34bn in current expenditure excluding interest compared with the prior year has been driven by a £14bn increase in benefit payments, £9bn in higher central government staff costs, £5bn in additional central government procurement spending and £5bn in energy support scheme costs, plus £1bn in net other changes.

The rise in interest costs of £6bn to £61bn reflects a £14bn increase in interest on non-inflation linked debt to £38bn as the Bank of England base rate rose, offset by an £8bn fall in the interest payable on index-linked debt to £23bn as inflation is running at a lower level than it was for the same period last year.

The £7bn increase in net investment spending to £15bn in the first five months of the current year reflects high construction cost inflation among other factors that saw an £8bn or 23% increase in gross investment to £44bn, less a £1bn increase in depreciation to £25bn. 

Public sector finance trends: August 2023

Image of a table showing receipts, expenditure, interest, net investment, deficit, other borrowing and debt movement for the five months (cumulative) to Aug 2019, 2020, 2021, 2022 and 2023 respectively.

Receipts: £336bn (for the five months to Aug 2019(, £298bn, £355bn, £401bn, and £428bn (for the five months ended Aug 2023).

Expenditure excluding interest: (£323bn), (£428bn), (£386bn), (£384bn) and (£418bn).

Interest (£28bn), (£18bn), (£30bn), (£55bn) and (£61bn).

Net investment: (£13bn), (£30bn), (£18bn), (£12bn) and (£19bn).

(Subtotal) Deficit: (£28bn), (£178bn), (£79bn), (£50bn) and (£70bn).

Other borrowing: £13bn, (£74bn), £6bn, £2bn and £14bn.

(Total) Debt movement: (£15bn), (£252bn), (£73bn), (£48bn) and (£56bn).

Net debt: £1,792bn, £2,067bn, £2,226bn, £2431bn and £2,594bn.

Net debt / GDP: 79.8%, 98.8%, 96.2%, 96.5% and 98.8%,

Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled. 

The latest release saw the ONS revise the reported deficit for the four months to July 2023 up by £2bn as estimates of tax receipts and expenditure were updated for better data, and it also reduced the reported deficit for the 2022/23 financial year by £1bn to £128bn for methodology changes in addition to new data. 

The methodology changes also saw small revisions in the reported deficits for previous periods back to 1999, most notably reductions of £1bn to the deficits in 2019/20 and 2020/21 and an increase of £2bn in the reported deficit for 2021/22.

Balance sheet metrics

Public sector net debt was £2,594bn at the end of August 2023, equivalent to 98.8% of GDP.

The debt movement since the start of the financial year was £56bn, comprising borrowing to fund the deficit for the five months of £70bn less £14bn in net cash inflows as loan repayments and positive working capital movements exceeded cash outflows for lending to students, business and others.

Public sector net debt is £779bn or 43% higher than it was on 31 March 2020, reflecting the huge sums borrowed since the start of the pandemic.

Public sector net worth, the new balance sheet metric launched by the Office for National Statistics this year, was -£618bn on 31 August 2023, comprising £1,604bn in non-financial assets, £1,038bn in non-liquid financial assets, £2,594bn of net debt (£339bn in liquid financial assets less public sector gross debt of £2,933bn) and other liabilities of £667bn. This is a £61bn deterioration from the -£557bn reported for 31 March 2023.

This new measure seeks to capture more assets and liabilities than the narrowly focused public sector net debt measure traditionally used to assess the financial position of the UK public sector. However, it excludes unfunded employee pension liabilities that amounted to over £2trn at 31 March 2021 according to the Whole of Government Accounts, although they are expected to be much lower today as discount rates have risen significantly since then.

This article was originally published by ICAEW.

July public sector finances: a mixed set of results

Higher self-assessment tax receipts and end of energy support payments help improve what is otherwise a disappointing set of numbers.

The monthly public sector finances for July 2023 were released by the Office for National Statistics (ONS) on Tuesday 22 August 2023. These reported a provisional deficit for the fourth month of the 2023/24 financial year of £4bn, bringing the total deficit for the four months to £57bn, £14bn more than in the first third of the previous year.

Alison Ring OBE FCA, Public Sector and Taxation Director for ICAEW, said: “These numbers reflect a mixed set of results for the first four months of the financial year, as higher self assessment tax receipts and the end of energy price guarantee support payments led to an improved fiscal situation in July. But debt remains on track to hit £2.7trn by the end of the year, up from £1.8trn before the pandemic, adding to the scale of the challenge facing the government and taxpayers in repairing the public finances.

“Stubbornly high core inflation and the prospect of further interest rate rises will concern the Chancellor as he bears down on public spending in the hope of freeing up the money he needs to both pay for the state pension triple-lock and find room for pre-election tax cuts.”

Month of July 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the month of July 2023 was £4bn, being tax and other receipts of £93bn less total managed expenditure of £97bn, up 5% and 9% respectively compared with July 2022.

This was the fifth-highest July deficit on record since monthly records began in 1993, despite being a £3bn improvement over July 2022, driven by higher self assessment tax receipts and the end of payments under the energy price guarantee.

Four months to July 2023

The provisional shortfall in taxes and other receipts compared with total managed expenditure for the four months to July 2023 was £57bn, £14bn more than the £43bn deficit reported for the first third of the previous financial year (April to July 2022). This reflected a widening gap between tax and other receipts for the four months of £343bn and total managed expenditure of £400bn, up 7% and 10% respectively compared with April to July 2022.

Inflation benefited tax receipts for the four months, with income tax up 13% to £85bn and VAT up 9% to £65bn. The rise in corporation tax, up 17% to £30bn, reflected both inflation and the increase in the corporation tax rate to 25% from 1 April 2023. However, national insurance receipts were down by 3% to £57bn because of the abolition of the short-lived health and social care levy last year, while the total for all other taxes was down by 1% to £69bn as economic activity slowed. Other receipts were up 17% to £37bn, driven by higher investment income.

Total managed expenditure of £400bn in the four months to July can be analysed between current expenditure excluding interest of £334bn (up £26bn or 8% over the same period in the previous year), interest of £51bn (up £7bn or 16%), and net investment of £15bn (up £4bn or just over a third).

The increase of £26bn in current expenditure excluding interest compared with the prior year has been driven by £11bn from the uprating of benefit payments, £8bn in higher central government staff costs, £3bn in central government procurement and £5bn in energy support scheme costs, less £1bn in net other changes.

The rise in interest costs of £7bn to £51bn reflects a fall in the interest payable on index-linked debt of £6bn from £30bn to £24bn as inflation has moderated compared with the same period last year, combined with a £13bn increase in interest on non-inflation linked debt from £14bn to £27bn as the Bank of England base rate rose. 

The £4bn increase in net investment spending to £15bn in the first four months of the current year reflects high construction cost inflation among other factors that saw a £5bn or 17% increase in gross investment to £35bn, less a £1bn increase in depreciation to £20bn. 

Public sector finance trends: July 2023

 Four months toJul 2019 (£bn)Jul 2020 (£bn) Jul 2021 (£bn) Jul 2022 (£bn) Jul 2023 (£bn)
 Receipts270234282320343
 Expenditure(259)(348)(310)(308)(334)
 Interest(24)(15)(23)(44)(51)
 Net investment(10)(26)(13)(11)(15)
 Deficit(23)(155)(64)(43)(57)
 Other borrowing 4 (66) (22) 5 10
 Debt movement(19)(221)(86)(38)(47)
 Net debt 1,7962,0362,2392,4202,579
 Net debt / GDP 80.1% 96.9% 97.7% 96.6% 98.5%
Source: ONS, ‘Public sector finances, July 2023’.


Caution is needed with respect to the numbers published by the ONS, which are expected to be repeatedly revised as estimates are refined and gaps in the underlying data are filled. The latest release saw the ONS revise the reported deficit for the three months to June 2023 down by £2bn as estimates of tax receipts and expenditure were updated for better data, as well as reduce the reported deficit for the 2022/23 financial year by £1bn from £132bn to £131bn for similar reasons. The ONS also revised its estimates of GDP for more recent economic data, resulting in a lower reported net debt / GDP ratio.

Balance sheet metrics

Public sector net debt was £2,579bn at the end of July 2023, equivalent to 98.5% of GDP.

The debt movement since the start of the financial year was £47bn, comprising borrowing to fund the deficit for the four months of £57bn plus £10bn in net cash inflows as loan repayments and positive working capital movements exceeded cash outflows for lending to students, business and others.

Public sector net debt is £764bn or 42% higher than it was on 31 March 2020, reflecting the huge sums borrowed since the start of the pandemic.

Public sector net worth, the new balance sheet metric launched by the Office for National Statistics this year, was -£631bn on 31 July 2023, comprising £1,604bn in non-financial assets, £1,011bn in non-liquid financial assets and £336bn in liquid financial assets less public sector gross debt of £2,915bn and other liabilities of £667bn. This is a £54bn deterioration from the -£577bn reported for 31 March 2023.

This new measure seeks to capture more assets and liabilities than the narrowly focused public sector net debt measure traditionally used to assess the financial position of the UK public sector. However, it excludes unfunded employee pension liabilities that amounted to more than £2trn at 31 March 2021 according to the Whole of Government Accounts, although they are expected to be much lower today as discount rates have risen significantly since then.

For further information, read the public sector finances release for July 2023.

This article was originally published by ICAEW.

ICAEW chart of the week: Whole of Government Accounts 2020/21

My chart this week looks at the £3.3trn of net liabilities presented in the UK government’s consolidated financial statements for the year ended 31 March 2021 that were finally published more than 27 months after the balance sheet date.

Two column chart showing assets and liabilities that make up net liabilities of £3.3trn reported in the Whole of Government Accounts 2020/21 at 31 March 2021:

Assets £2.2trn

Fixed assets £1.3trn
Receivables £0.2trn
Investments £0.4trn
Financial assets £0.3trn

Liabilities (£5.5trn)

Financial liabilities (£2.6trn)
Payables (£0.2trn)
Provisions (£0.4trn)
Pensions (£2.3trn)

The UK’s Whole of Government Accounts for the year ended 31 March 2021 were published and submitted to Parliament on 20 July 2020, more than 27 months after the balance sheet date. These are consolidated financial statements prepared in accordance with International Financial Reporting Standards (IFRS) that incorporate the financial results of more than 10,000 public bodies in the UK across central government, local government, and other parts of the public sector. 

The Whole of Government Accounts provide a much more comprehensive picture of the financial performance and position of the UK public sector than is presented in the statistics-based National Accounts, using a financial language familiar to millions of users of financial reports in the private sector. 

As our chart this week highlights, the statement of financial position (balance sheet) of the UK public sector at 31 March 2021 was in heavily negative territory with £3.3trn in net liabilities, comprising assets of £2.2trn less liabilities of £5.5trn. This compares with net liabilities of £2.8trn a year earlier.

Assets of £2.2trn comprised £1.3trn in tangible and intangible fixed assets, £0.2trn in receivables and other non-financial assets, £0.4trn in non-current investments and £0.3trn in cash and other current financial assets. Liabilities of £5.5trn comprised £2.6trn in debt and other financial liabilities, £0.2trn in payables, £0.4trn in provisions and £2.3trn in net pension obligations.

Fixed assets of £1,313bn consisted of infrastructure assets of £677bn, land and buildings of £409bn, plant and equipment of £184bn, and intangible assets of £41bn. Receivables and other non-financial assets of £218bn comprised £164bn in tax receivable and accrued, £39bn in other receivables, prepayments and accruals, and £15bn in inventories. Non-current investments of £360bn comprised £152bn in loans and deposits, £85bn in student loans, £44bn in equities, £60bn in other financial investments, £16bn in investment properties, and £3bn in assets held for sale. Cash and other current financial assets of £317bn comprised £40bn in cash and cash equivalents, £12bn in gold, £129bn in debt securities, £101bn in loans and deposits, and £35bn of other financial assets.

Debt and other financial liabilities of £2,639bn comprised £1,265bn in externally held gilts, £203bn in direct borrowing from the public through National Savings & Investments, £53bn in short-term treasury bills, £815bn in Bank of England deposits, £84bn in bank and other borrowing, £85bn in banknotes, £27bn in derivatives, £20bn in financial guarantees, and £87bn in other financial liabilities. Payables of £221bn comprised £44bn in trade and other payables, £81bn in accruals and deferred income, £55bn in tax refunds, and £41bn on PFI, finance leases and other contracts. Provisions of £366bn consisted of £159bn for nuclear decommissioning, £87bn for clinical negligence, £36bn for payments to the EU, £29bn for the Pension Protection Fund, and £55bn in other provisions for liabilities and charges. Net public sector pension obligations of £2,306bn comprised £2,168bn in unfunded pension obligations (including £792bn for the NHS, £501bn for teachers, £339bn for the civil service, £254bn for the armed forces, £209bn for police and fire services, and £73bn other) and a net £138bn (£479bn of obligations less £341bn in fund assets) for local government and other funded pension schemes. 

Not shown in the chart is the revenue and expenditure statement, which reported revenue of £732, expenditure of £1,063bn and finance and other items of £73bn to give a net accounting loss for the year of £404bn – more than twice the £192bn loss reported for the pre-pandemic year. The financial statements covered the first year of the coronavirus pandemic, which saw income fall and costs soar, resulting in net borrowing during the year of £524bn according to the cash flow statement.

The Whole of Government Accounts is probably the most important report published by the UK government each year, but you wouldn’t have known that by the lack of fanfare on its publication amid the wave of hundreds of other documents released ahead of the parliamentary recess. This may be driven by understandable embarrassment by the length of time it has taken to prepare them – more than 27 months after the balance sheet date compared with the nine months that is its long-term aim – as well as by the gaps in preparation caused by local authorities and other public bodies that are substantially behind in producing their individual financial statements, leading to an additional audit qualification for completeness this year.

Despite that, and the other audit qualifications that highlight problems with the numbers reported, every citizen ideally should read the Whole of Government Accounts 2020/21. After all, it tells the financial story of the most dramatic year in recent history.

Read more: Whole of Government Accounts 2020/21.

This chart was originally published by ICAEW.